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spk08: Ladies and gentlemen, good day, everyone, and welcome to VIP Shop Holdings Limited's first quarter 2022 earnings conference call. At this time, I would like to turn the call to Ms. Jessie Jung, VIP Shop's head of investor relations. Please proceed.
spk07: Thank you, operator. Hello, everyone, and thank you for joining VIP Shop's first quarter 2022 earnings conference call. With us today are Eric Shen, our co-founder, chairman, and CEO, and David Tsui, our CFO. Before management begins their prepared remarks, I would like to remind you that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our Safe Harbor Statements in our earnings release and public filings with the Securities and Exchange Commission, which also applies to this call to the extent any forward-looking statements may be made. Please note that certain financial measures used on this call, such as non-GAAP operating income, non-GAAP net income, and non-GAAP net income per ADS are not presented in accordance with U.S. GAAP. Please refer to our earnings release for details relating to the reconciliation of our non-GAAP measures to GAAP measures. With that, I would now like to turn the call over to Mr. Eric Shen.
spk09: Okay. Good morning and good evening everyone. Welcome and thank you for joining our first quarter 2022 earnings conference call. We had slower than expected quarter due to the resurgence of COVID-19 cases in China on top of a really challenging micro-environment which depended the general customer sentiment. Starting in March, With tightened controls and city lockdowns in many places, our warehousing and logistic capacity has been undergoing serious delays or disruptions. This has undermined our fulfillment efficiency and further discouraged consumers from spending, especially on discretionary items. Despite great pressure on sales and consumption, we remain on track to execute on our merchandising strategy to further strengthen our competitiveness for the long term. We are delighted to see that our proven business model enabled us to sustain a healthy level of profit and achieve the resilient margins through this spring operations. In the first quarter, we continued to provide support for co-brands, offering them more leverage to improve sales through our upgrade merchant platform. We also brought in many new and trendy brands, enriching product selection on our platform. Furthermore, we expanded our high-value customers. Our active SuperVIP customers grew by 7%. 37% year-over-year and contributed about 38% of online net GMV in the first quarter. With the COVID-19 outbreak developing, we have responded quickly to changing consumer demand. By leveraging our merchandising capabilities, we added a range of product offerings in non-apparel categories, including products for everyday use, This helped in part offset the soft demand in apparel categories. While we remain cautious ahead amid ongoing COVID-19 flash ups, we are strongly committed to our strategic position as a discount platform for branded products. We will take this opportunity to look to create exceptional value for our brand partners and the consumers At this point, let me hand over the call to our CFO, David Shui, who will go over our financial results.
spk02: Thanks, Eric. And hello, everyone. In the first quarter, despite soft top-line performance due to macro headwinds, our margins held up relatively well thanks to our initiatives to manage costs and expenses with greater discipline. Our gross margins showed resilience after we implemented a number of cost-saving measures. For example, we were able to effectively improve the margin profile of many product categories after we became more focused on shifting traffic and resources to core brands, while de-prioritizing low-quality brands. Our net margin also stayed well above 5% as we became more efficient in marketing spend. Looking ahead, we will continue to optimize operational efficiency and make every effort to deliver healthy and sustainable profitability. In addition, during the quarter, we had fully utilized the $500 million share buyback program that we announced last year. On March 31st this year, we announced another $1 billion share buyback program, which we may execute from time to time over a period of 24 months. This demonstrates our confidence in our business potential and our commitment to creating shareholder value for the long term. Now moving to our detailed quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented below are in RMB, and all the percentage changes are year-over-year changes, unless otherwise noted. Total net revenues for the first quarter of 2022 were 24.2 billion RMB as compared with 28.4 billion RMB in the prior year period, primarily attributable to soft consumer demand for discretionary categories and adverse impact on warehousing and logistics networks caused by COVID-19 resurgence in China. Growth profit was 5.0 billion RMB as compared with 5.6 billion RMB in the prior year period. Growth margin increased to 19.8% from 19.7% in the prior year period. Total operating expenses decreased by 11.0% year over year to 3.9 billion RMB from 4.4 billion RMB in the prior year period. As a percentage of the total net revenues, total operating expenses was 15.4%, which stayed flat as compared with the corresponding period in 2021. fulfillment expenses decreased by 5.5% year over year to 1.7 billion RMB from 1.8 billion RMB in the prior year period. As a percentage of the total net revenues, fulfillment expenses was 6.7% as compared with 6.3% in the prior year period. Marketing expenses decreased by 41.3% year-over-year to 759.3 million RMB from 1.3 billion RMB in the prior year period, primarily attributable to more prudent marketing strategy. As a percentage of a total net revenues, marketing expenses decreased to 3.0% from 4.6% in the prior year period. technology and content expenses increased to 390.4 million RMB from 337.5 million RMB in the prior year period. As a percentage of a total net revenues, technology and content expenses increased to 1.5% from 1.2% in the prior year period. General and administrative expenses were 1.1 billion RMB as compared with 956.7 million RMB in the prior year period. As a percentage of a total net revenues, general and administrative expenses was 4.2% as compared with 3.4% in the prior year period. Income from operations was 1.3 billion RMB as compared with 1.5 billion RMB in the prior year period. Operating margin was 5.1% as compared with 5.3% in the prior year period. Non-GAAP income from operation was 1.5 billion RMB as compared with 1.7 billion RMB in the prior year period. Non-GAAP operating margin was 6.0%, as compared with 6.1% in the prior year period. Net income attributable to VIP shops shareholders was 1.1 billion RMB, as compared with 1.5 billion RMB in the prior year period. Net margin attributable to VIP shops shareholders was 4.3% as compared with 5.4% in the prior year period. Net income attributable to VIP shops shareholders per diluted ADS was 1.61 RMB as compared with 2.18 RMB in the prior year period. Non-GAAP net income attributable to VIP shops shareholders was 1.4 billion RMB as compared with 1.7 billion RMB in the prior year period. Non-GAAP net margin attributable to VIP shops shareholders was 5.6% as compared with 6.0% in the prior year period. Non-GAAP net income attributable to VIP shops shareholders per diluted ADS was 2.09 RMB as compared with 2.41 RMB in the prior year period. As of March 31st, 2022, the company had cash and cash equivalent and restricted cash of 14.3 billion RMB and short-term investments of 5.0 billion RMB. Looking forward to the second quarter of 2022, we expected our total net revenue to be between 22.2 billion RMB and 23.7 billion RMB, representing a year-over-year decrease rate of approximately 25% to 20%. Please note that this forecast reflects our current and preliminary view of the market and operational conditions, which is subject to change. With that, I would now like to open the call to Q&A.
spk08: Thank you. To ask a question, you will need to press star one on your telephone. To answer your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question from Thomas Chong with Jefferies. Your line is open.
spk01: Hi, good evening. Thanks, management, for taking my questions. My first question is about the second quarter guidance. Can management comment about the impact of pandemic to our business performance in April and so far in the month of May? And my second question is about the second half business momentum Can management comment about the recovery momentum that we should expect as well as the margin outlook for the year? 晚上好,謝謝管理層介紹我的提問。 我的第一個問 題是關於我們Q2的收入的指引的。 管理層可不可以分享一下在疫情底下來,我們在4月份, And now in May, what is the situation of our income? And the second question is about our third half of the year. I would like to ask how we should look at the recovery, the speed of the recovery, and the current year's margin. Thank you.
spk09: Let me answer the first and second questions. In March, we saw the rapid expansion of China due to the epidemic. Business has changed a lot. It used to be normal, but it has changed a lot since March. There are two reasons. One is that the supply chain was closed due to the epidemic. Then express delivery, etc., including that brand can't send goods, etc. Then a large number of customers cancel orders, etc. Then this is an impact on us. Then this situation has actually continued until April and May. Then including now, we actually have more than one million orders in our hands. In fact, it has not been sent out because, for example, there is a problem in Shanghai. The supply chain has a lot of warehouses that are still locked there. It is equivalent to the customer's order. China China Beijing is in control, part of it is in control. So we also see that in fact, the confidence of consumers, after the outbreak of the epidemic in March, in fact, is greatly discounted. We also see the statistics, including the overall sales of clothing, will fall very badly. So we are talking about the future. In May and June, we don't look good. But in the second half of the year, we actually don't think it will be too optimistic. That's what we think. But, I don't think it will be worse than it is now, but it may be better, but it won't get any better. So we are predicting the future. In addition, we are actually confident about the profits of our company, because we think that although the business is a little worse now, but because our company's profits are relatively stable, plus during the epidemic, OK. The guidance for the second quarter actually reflects our current look for the uncertainties from the ongoing and potential restrictions to control the COVID outbreak.
spk07: as well as the general consumer sentiment. Our business has actually been quite normal until in the middle of March when the Omicron outbreak had significantly impacted our business. Our warehousing and the logistics capacity was disrupted or delayed, and the whole supply chain faced a lot of problems. Some of our warehouses were closed down, and logistics got delayed, and also suppliers also had restraints in terms of shipping and handling parcels. Entering into April and into now May, we actually have been facing continued pressure. I think to today we still have over one million orders that cannot be delivered because of various reasons, including suppliers based actually in restricted regions. that actually undermined the full human efficiency. So we expect for May and June, we haven't seen clear signs of recovery, and we actually don't expect that the COVID impact will disappear very soon, especially we have seen other places like Beijing faced restrictions or controls, and also consumer sentiment, consumer confidence has not come back. We've also seen that the latest MBS data point to a very sluggish performance for discretionary items, including apparel. So generally speaking, we don't feel very optimistic for the momentum for the second half, but we don't expect it will be significantly worse as well. On the margin side, I think we are pretty confident in maintaining a healthy level of profit and margins While we face a lot of challenges and uncertainties, we also maintain a very high level of discipline in our operations. We manage our costs and expenses much more carefully. We scaled back a lot of low ROI spending, so we are pretty confident that we will deliver healthy and sustainable profitability. profitability for this year.
spk01: Thank you.
spk08: Our next question is from Alicia Yap with Citigroup. Your line is open.
spk06: Hi. Thank you. Good evening, management. Thanks for taking my questions. I have a question related to the expansion into the non-apparel products. So can management elaborate a little bit more detail the various kinds of the products, you know, on this category? And can you remind us, is this a strategy, you know, strategic change or the strategic business model shift? or is this just a temporary approach so that we can navigate through the soft demand for the apparel business? And then a second question is, any colors in terms of what are some of the current inventory level for the apparel brand? Can we get any um kind of like leverage or is it just because consumption is so weak so even though there's a lot of inventory uh we can do some promotion discount but there's still lack of the demand so any color you can share uh would be good uh This is the first question, which is the category of non-suitable products. We can probably say that there are several categories. Is this a long-term adjustment, or is it just a short-term one? Because of the impact of the epidemic, it is a short-term one, so we have to go through this short-term impact. The second question is the category of So even if we get some good stock But there may not be any hospitals, or the cost of hospitals is also very low. So let's see if the management can help us share. Thank you. For the standard products, we are, for example, we originally, because we are doing credit-based, in general, our standard products account for about 30%.
spk09: Then the credit-based will account for 70%. Then we are actually in the In the recent process, we found that our consumers have a relatively strong demand for standard products. If we don't do well in this area, consumers will buy clothes at our store and standard products at other places. So we actually made some improvements. We hope to make our standard products more characteristic and cost-effective. We don't need too many SKUs, but we need to have characteristics in these common SKUs. So this is our standard product strategy. In addition, our standard product, especially in the summer, the demand for standard products will increase. So this is actually the strategy of our entire company. We hope that our standard products can do better and meet the needs of consumers. In addition, adapt to these seasonal needs. In addition, especially before the epidemic, it is another matter. In fact, We are a long-term strategy, so we hope to increase its proportion. In addition, it is actually mainly to increase the up of users. So this is our answer on the label side. So the second question you just asked is about the increase in inventory of goods. So because we do see that because of the epidemic, in fact, many brands have been hit quite a bit, including the closure of offline stores, including the decrease in consumption. In fact, for us, there will be more supply of goods, but some of them are still not enough. For example, in Shanghai, the suppliers are now China China China China Okay, first, standardized products. Actually, I think as a company, we still focus on apparel categories. Currently, we still have 70% generally from apparels.
spk07: and the rest, 30%, are from standardized products. Standardized products are a very good complement to our overall platform. They can help us to cater to a diverse range of customer needs, which actually vary depending on season and a lot of other factors. For example, in summer, Typically, customers would like to buy a lot of standardized products in addition to summer clothing. And also, we approach standardized products very carefully. For example, we want to make sure we have the unique supply from Top Rents and with a very competitive pricing. We try to meet customer needs especially when they shop for clothing, they will have something else to choose from to provide them with a one-stop shopping experience. So this is our overall strategy on standardized products. And given the COVID-19 outbreak, I think we proactively added some non-apparel product offerings, especially including products for everyday use to meet customer needs. This is in line with our overall strategy to standardize the products. We will gradually improve the contribution from these standardized products to improve the overall customer experience on our platform. and also to improve their overall output. And on brand inventory, right. And on brand inventory, apparently a lot of our brand partners are very hard hit by the COVID flare ups. They faced a lot of store disclosures and they have a lot of supply. But generally speaking, I think we have the ability to secure a lot of quality inventory from brands and help them to sell through these inventories very efficiently. But at the same time, some of the brand partners are also facing continued pressure especially when they are based in restricted regions, including Shanghai. So this is a positive to our online business. I think although, generally speaking, the market is in a downturn, but it's not that bad, as long as we can help brands to to sell through their inventory, I think it will be providing a valuable proposition for them.
spk06: Can I have a quick follow-up? On the margins for the standardized product, given the mix, how should we think about the total gross margin trends going forward or in the near term?
spk02: OK. For the standardized items, we carefully choose what product we will carry. Generally, we will not accept the product that's with very low margin. So overall, the impact of the margin is not that bad. And also the apparel product still represents 70% of our total carrying. So we are committed to the overall gross margin stability.
spk06: Okay, thank you.
spk08: Our next question comes from Ronald Kuong with Goldman Sachs. Your line is open.
spk04: Thank you, Mr. Shen, David, and our team. Let me ask first, and then I'll translate it into English. First, I'd like to ask about the guidance for the second quarter. We saw a drop of 20 to 25. Is this because we saw the run rate in April? And we actually have a 6-1-6 every year for May and June. Is this because we have a run rate in April? There is a recovery, and in April, will we see that the cancellation rate is higher than usual? Secondly, I would like to ask about our cash flow situation, because I saw that in the past 12 months, our free cash flow has dropped. So I want to hear some of the factors in this. And for us, buyback is also doing very well. I want to know about our dividend. Thank you, management. My first question is on your second quarter revenue guidance, whether that assumes a similar growth rate for May and June of what we've seen in the April run rates and some expectations on our June 16th for us. Any expectations on that, that we're assuming some of the stronger growth? a little better into the month of June and some of the cancellation rates that we're seeing. Second is on free cash flow. We've seen a reduction of that. So I want to hear what were the reasons behind. And besides the buyback program that we've enlarged, I want to hear any dividend policies, any updates on any of those, any potential, and also for Hong Kong listing. Thank you.
spk09: Let me answer the first question. Regarding our guidance for the second quarter, we actually should have predicted that in May, for example, we have been there for more than 20 days now. So it's actually almost the same as our fall in April or May. In addition, we actually also encountered business in June. China China China About the order cancellation rate, it is indeed because we actually have a lot of orders from March 10th to now every day. Because it was cancelled after it was generated, because the user waited a few days and found that the goods didn't come, etc. So it will actually cancel. We saw that we actually have a huge loss here. We saw that our order cancellation rate is actually six years higher than it used to be.
spk07: Okay. The second quarter guidance actually already factored in the April and May run rate. I think it's the latter half of May, and from our observation, we have had a similar downside trend as we saw in April. And we expect June will continue this momentum for sure. It's going to be done on a year-over-year basis. And coupled with COVID-19 cases, related restrictions and controls are still going on. And consumption sentiment has not come back yet. So that's creating the reality for this quarter to date. So our second quarter guidance is just a reflection of that reality. In terms of cancellation rate, absolutely, actually from the middle of March, we've seen cancellation of orders have been going up due to logistics delayed. And cancellation rate actually went up six percentage points year over year, and it has caused very significant losses to us. And with the increasing cancellation of orders from customers, it actually has dampened the general sentiment to the e-commerce sector. I think we for sure hope that with the restrictions gradually lifted, we expect the consummation rate to normalize over time.
spk02: We have been profitable for over 38 quarters, so we are confident that we will continue to making profit. even though we encounter a difficult time and a softer business. So in general, the free cash flow should mirror our profitability. In Q1, our operating cash flow turned negative because we made a lot of payment to suppliers and for other miscellaneous expenses. So the decrease in accrued expenses and accounts payable is the main reason for the negative cash flow. In the long run, the cash flow should mirror the profitability. And in terms of the Hong Kong listing, So that is still in our radar. Our board and the management team are still evaluating the options, and we still got some time to execute the plan and execute the Hong Kong listing plan.
spk04: Thank you, Shanda.
spk02: Thank you, David. The dividends, so currently we don't have a plan. to pay out dividends, but we're committed to our share buyback program.
spk04: Understood. Thank you.
spk08: Our next question comes from Natalie Wu with Haitong International. Your line is open.
spk05: Thank you for accepting my question. I have one more question. You just mentioned that we need to increase the proportion of labels. What kind of labels are you referring to? In 2019, we also expanded the number of labels. Is there a difference between the number of labels and the number of labels? Good evening, management. Thanks for taking my question. So my question is regarded with the product mix shift. you mentioned that you decided to shift the product next towards the standardized goods in the coming future. I'm just wondering, can you give us more colors on exactly which categories of the standardized products you are referring to? Because back in 2018 and 19, we've also tried some category expansion. So just wondering if there's a difference compared with the last round of standardized product shifts. Also, how should we differentiate ourselves from other general e-commerce platforms if we shift the way to standardized products? Thank you.
spk09: home appliances, kitchen appliances, including生活超市, including gold products, etc., such as health products, etc. What we mean is that our company's standard products and non-standard products, in fact, are standard products that are relatively unparalleled. These are what we think are standard products. So we actually have this kind of category, which is basically the same as what we originally said we were going to do. We didn't say which categories we had to rush to. But we have a balanced development. Then our target, for example, because we think that our standard products are more characteristic, especially the extreme cost-effectiveness. In addition, very good quality, good brand, extreme cost-effectiveness. Not to exclude that there are brands that specialize and customize for us. We hope that we don't want to use a lot of SKU, just use some very special products to make our characteristics, extreme cost-effectiveness. Then we will attract our users. And they think that, for example, they will buy this kind of logo in Weiping. In fact, it is also worth it. Because Weiping has already helped them to select. So we are this concept. Then we think about it ourselves. Because our main business is still wearing. Wearing is the most characteristic. But we hope that on the logo, for example, we think that in the future, we may go through our efforts. For example, our current logo ratio is 30. In terms of strategy, Senator, the products, actually all the categories are already on our platform, including beauty products, home goods,
spk07: kitchenware, life and groceries, and health care products, etc. These non-size products are standardized items we are looking at. We will manage the product offerings very carefully in each category, not necessarily as many SKUs as you see on other platforms. We want to make sure that we can have very quality supply from brands. And sometimes it may be unique supply from the top brands. And it has to provide a very competitive pricing and a very reasonable gross margin. So we will approach standardized items very carefully. Currently, we have 30% from standardized items. Our goal is to gradually improve the contribution to, let's say, 33% over time, an increase of 10% on the current basis. And standardized items are not going to be a drag on the overall gross margin. And it actually improves ARPU from our customers. So over the time, we think we will have a more balanced customer experience for our platform.
spk08: Got it. Thank you. Our next question comes from Robin Luong with Daiwa. Your line is open.
spk03: Hi. This is Robin asking on behalf of John Choi. Thanks, management, for taking my questions. This quarter, the gross margin is slightly higher than our expectation. Is it because of the change in the category mix? And because I remember the SBIPs, the members, they carry a lower margin. But the mix this quarter is also higher, so wonder what is the reason that this quarter we see a more better than expected gross margin. And also the trend in the second half, if the SVIP continues to increase the mix, are we going to see any impact on the gross margin? And the second question is, could management comment on the user growth trend in the second half? 谢谢管理长介绍我的提问。 我想问一下这个 growth margin 这个 quarter 比我们想象的还有一点点。 想问是不是因为这个 change 在这个 category mix 还有这个 SVIP 我们就 Okay, so this year we have
spk02: taken many cost-saving measures to improve our margin. That includes the selection of the products and the brands carried on our platforms. For example, we were able to improve the margin profile of many categories after we shifted our resources to the to the core brands that we selected and to prioritize some of the non-core brands. So that helps improve our margin. For the coming quarters, we will continue to be disciplined and make sure that we have a healthy margin and eventually achieve a healthy bottom line net margin. And on the category mix, And the apparel, the apparels are still representing 70% of our total GMV, right? And then supplemented by the standardized products. And as we talked about it earlier, for the standardized products, we also carefully choose what to carry to make sure that our overall gross margin will remain stable and potentially we could improve the gross margin also. In terms of the impact of the super VIP and we know the super VIP has slightly lower gross margin because of the benefits and we provided it to the group. But since they spent more, they spent a lot much more and then Their frequencies are much higher. Overall, it's just a matter of time when they can contribute positively to the overall gross margin. It's kind of a balance. In summary, we are committed to the overall improvements of the gross margin.
spk09: 我们现在的用户增长 其实跟业绩还是蛮相关联的 因为我们的现在UP持续稳定 所以我们讲的就是 今年下半年的 We still have a stable user growth. So what we actually think is that we don't have to spend a lot of money, or we don't have to spend a lot of money, or we don't have to spend a lot of money, or we don't have to spend a lot of money,
spk07: In terms of customer growth for the second half, I think our customer growth has been relatively in line with our overall business performance, given that our R pool has actually been quite stable over time. But we will evaluate our marketing spend from time to time, especially given the many uncertainties going on. We are apparently facing a much less variable customer acquisition environment. So instead of just throwing money away, we will focus on acquiring high-quality customers. We don't want to invest too much. low ROI customers, and we will evaluate their lifetime value very carefully to ensure that they will be a valuable customer to our platform. So we are committed to customer growth, and we believe that for the quarter ahead, we will maintain a relatively stable customer base.
spk03: Thank you.
spk08: Due to time constraints, that concludes today's question and answer session. At this time, I will turn the conference back to Jessie for any closing remarks.
spk07: Thank you for taking the time to join us today. If you have any questions or follow-ups, please don't hesitate to contact our team. We look forward to speaking with you next quarter.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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